Against the backdrop of last month’s stock market swoon, which erased the gains of 2018, oil and gas companies reported their quarterly earnings.
Equinor (formerly Statoil), among others, released its results, reporting adjusted earnings before interest and taxes of $4.8 billion for the third quarter, just below the Reuters poll of analysts who expected earnings of $4.9 billion. Still, as Reuters observed, these results were the highest quarterly earnings in four years, and nearly double the same quarter in 2017.
At the same time, Equinor indicated it was reducing its capital expenditures budget for the year from $11 billion to $10 billion, though it expected to preserve its exploration budget of $1.5 billion in 2018.
Axios pointed out in its reporting that the reduction in CAPEX was made possible by “capital discipline and efficient project execution,” according to Equinor, and the Financial Times mused that the reduction is “likely to soothe investor fears that costs will start to head substantially higher following the oil price recovery to above $75 per barrel.”
This month’s theme on exploration innovations was chosen specifically to highlight two present realities in the oil and gas markets. First, that we must keep exploring if we are going to meet future demand. Second, that innovation is essential to explore efficiently and effectively.
The Equinor announcement highlights a third reality: notwithstanding the increases in oil prices we’ve seen in recent years, the cost controls put in place in response to the downturn persist.
And it’s not just E&P companies looking to the future and tightening their belts. The major oil and gas producing economies are, too.
Changing Energy Dynamics
What do changing energy dynamics mean for major oil and gas exporters? That’s the subtitle of a newly released “Outlook for Producer Economies 2018” report by the International Energy Agency.
The report looks at the effects of recent oil price volatility on those large producers whose economies are highly reliant on exports revenue and where petroleum exports make up at least one-third of the nation’s total exports.
These are the countries for whom swings in oil prices – and it’s mostly oil exporters we’re talking about – have immediate and direct impact on economic health. For example, according to IEA, Canada and Kuwait export roughly equal amounts of oil, but for Canada it represents about 15 percent of total exports, whereas for Kuwait it is 90 percent.
We understand intuitively that economies most exposed to oil price volatility will experience economic volatility. Venezuela’s people, including our Members, are experiencing firsthand the devastating and destabilizing impact of this squeeze on government spending. And as the report illustrates the reason is clear: “since 2014, the net income available from oil and gas has fallen by between 40 percent (in the case of Iraq) and 70 percent (in the case of Venezuela).”
Economists at IEA modeled several different future scenarios, assessing the impact of various pricing and demand scenarios on the expected income these large oil exporters could expect to realize between now and 2040.
The New Policies Scenario takes an aspirational view of the future, looking at today’s policy frameworks, how they might evolve, and expecting technological advances to promote the continued use of oil and natural gas, with no peak demand.
The Low Oil Price Scenario assumes that prices remain in their current range, from $65 to $70 per barrel, and assumes rapid efficiency gains and the adoption of electric vehicles, and other fuel-switching reducing the demand for oil.
The Sustainable Development Scenario projects low oil prices and low future volumes, assuming peak demand for oil and limited growth for natural gas.
Modeling the output of these scenarios yields highly variable results through 2040, with net income growing strongly under the NPS, modestly in the LOP, and falling in the SDS. Plotting the net income on a per capita basis reveals another challenge: only the NPS shows net income growth per capita. It’s virtually flat through 2040 in the LOP and drops substantially in SDS. That is, only under NPS does the nation’s wealth grow on a per capita basis.
Supporting Economic Transformation
With growing populations and a wide range of possible future scenarios for oil and natural gas, the driving message of the report is clear: “standing still is not an option.”
Diversifying and creating more economic resilience in these nations is a significant challenge, and energy isn’t the only factor, but it’s a significant one, and the report outlines five ways that the energy sector can support this economic transformation:
- Invest in refining and petrochemicals to extract more value from the raw commodities.
- Use natural gas as a feedstock or fuel source to support industrial diversification.
- Consider the deployment of renewable and nuclear energy technologies.
- Stop subsidizing domestic consumption of oil and natural gas.
- Continue investing in oil and natural gas exploration and production to protect and preserve the economic engine powering this transformation.
In other words, don’t kill the goose.